How GST Helped Corporates But Failed Consumers

Multiple issues have reduced the effectiveness of GST and eroded the constitutional rights of states, writes Kerala Finance Minister TM Thomas Isaac with his co-authors in a new book.

T.M. Thomas Isaac, Lekha Chakraborty and R.Mohan

Hindustan Times via Getty ImagesFile photo of a protest held by the women's wing of the Nationalist Congress Party outside the Sales Tax office in Mumbai demanding exclusion of sanitary napkins from the GST ambit. After many protests, the Modi government put sanitary pads outside the GST but consumers say that has not led to any significant reduction in prices.

The implementation of GST has been affected by a plethora of problems. Some of the major issues deserving mention are:

a) Despite the sharp reduction in the incidence of tax burden under the GST regime there was no reduction in the Maximum Retail Prices (MRP) but for a few commodities. The reduction of tax only resulted in windfall gains for corporates and traders at the expense of the consumers. The anti-profiteering clause (Section 171 of the CGST act, 2017) was not implemented along with GST and this left the consumer who was exploited by certain traders without any statutory forum to voice grievances. The state governments forwarded complaints to the Centre but no effective action could be taken. The general perception has been one of increase in the tax because the GST rates printed on the invoices were invariably higher than the erstwhile VAT rates.

Table 5.1: GST collection during August 2017-May 2018 (Rs crore)

Month

GST Collection

August 2017

93, 590

September 2017

92, 029

October 2017

95,132

November 2017

85,931

December 2017

83,716

January 2018

88,929

February 2018

88,047

March 2018

89,264

April 2018

1,03,457

May 2018

94,016

Source: Press Information Bureau, Government of India.

b) The IGST Act, 2017, (section 18) provided that States would get their SGST share only when a dealer having inter-State trade pays output tax, files return and claims credit for input tax. In other words, IGST (which is CGST + SGST) which is paid in inter-State trade remains with the Centre which acts as a clearing house for States which are destinations of supply of goods and services and only subsequently trickles down to the States. This results in the States’ share in IGST remaining with the Centre for a considerable time, creating liquidity problems for the States and forcing them to borrow money and pay interest while their dues are available as interest free ways and means for the Centre. IGST Act, 2017, needs an amendment to provide for provisional apportionment of the States’ share without elapse of time.

c) The major disappointment was the functioning of the GSTN and the lacklustre performance of the IT backbone. For a whole year, tax collection was based on a summary statement submitted by taxpayers (GSTR 3B) from which it is not possible to verify the veracity of the input credit claims, which is generally believed to be excessive. The GST Council is yet to decide upon the final format of tax returns. Not only has this led to substantial leakage of revenue but also piling up of the export refunds.

d) The delay in implementation of e-Way bill and immediate abolition of checkposts have resulted in substantial tax evasion, especially in inter-State trade, where there was no effective mechanism to check flow of goods in the interregnum between the abolition of checkposts and implementation of the e-Way bill system. This is evident from the volatile trends in GST revenue during the first year of its implementation (table 5.1).

The GST rates did not stabilize in the initial year of implementation and there were frequent changes in them, which created expectations of further changes in future and impeded the implementation of a sustainable tax system. As already stated, return filing under GST has proved to be cumbersome for small traders and there have been moves to simplify the same. Many important provisions were not implemented along with GST and are only now being put in place. These have led to a situation where afterthought was taking precedence over careful planning before implementation.

These statutory and implementation issues have reduced the effectiveness of GST, which has also eroded the constitutional rights of the States. If the present costs of erosion of States’ taxing powers originally envisaged under the Constitution, more than outweigh the expected revenue gains and enhanced spending capabilities, the tenets of this tax reform would become unacceptable in the medium run. This would in turn lead to a call for revising the framework and implementation procedure of GST.

Though many viewed GST critically as it took away the constitutional power of the States to vary tax rates even within a narrow band, they were willing or rather compelled to accept GST, as it was expected to bring in more revenues due to expansion of the tax base and through self-compliance. These were in turn expected to enable the States, which were facing a slowdown in VAT revenue growth, to allocate more resources for social sector and capital expenditures. In practice, the expected benefit from a larger tax base outweighed the loss consequent to the erosion of the inherent principle of fiscal federalism, which enabled sub-national entities to fix their tax rates. The incursion into States’ fiscal domain that the statutory features and implementation of the GST have involved has dampened the expectations of even reasoned critics.

In the prevailing context, vertical fiscal imbalances between the Centre and the States are worsening and it goes counter to building a healthy democratic and federal polity. This would in turn shrink social sector spending leading to adverse impact on human development indicators, inclusive economic growth, and fiscal disempowerment of the states. There is need for a substantial shift in the attitude of the Centre with regard to ameliorating vertical imbalances in the larger interests of the federal and democratic fabric of the country.

Along with Kerala Finance Minister TM Thomas Isaac, the book has been co-authored by Prof Lekha Chakraborty of the National Institute of Public Finance and Policy, and R Mohan, former Commissioner of Income Tax (Appeals).

Excerpted with permission of Leftword Books from Challenges to Indian Fiscal Federalism by T.M. Thomas Isaac, Lekha Chakraborty and R.Mohan. Rs. 295